Types

• New York State allows several different types of life insurance contracts to be sold. Whole life insurance is the most common types of life insurance next to term life insurance. Term life insurance is a type of insurance that gives you a death benefit in exchange for premium payments. Whole life insurance comes with higher premium payments but also a cash value account. Universal life insurance provides flexible premiums and death benefits with a cash value account.
  
  

Benefits

• Life insurance is generally income tax free. This means that when you die, there is no income tax due on the death benefit proceeds. Additionally, New York State does not charge income tax against any policy loans from life insurance policies.
  
  

Drawbacks

• If you withdraw more money from your life insurance than you pay in premiums, New York State charges income tax on the excess withdrawals and treats these withdrawals as income. Additionally, if you surrender or cancel your policy and there is any cash value in the policy, you will be taxed at ordinary income tax rates on any gains inside of the policy that exceed your total premium payments. Your death benefit may be subject to inheritance taxes in New York if the death benefit is left to your estate instead of a beneficiary.
  
  

Prevention/Solution

• Make sure that your policy does not lapse or, if it does lapse, that you don't have a gain in the policy. Also make sure that your policy is removed from your estate before you die if you want to avoid any possibility of inheritance taxes.
  
  

Considerations

• Because of the generally tax-free nature of life insurance, a common misconception is that life insurance is completely tax free. This is only true in instances when the policy remains in force and you do not realize a gain from policy withdrawals.